Dip in debt default continues

The rate of defaults in debt instruments rated by Crisil is on the decline since 2000. Crisil's annual default rates for the five years till 2004 were at an average of 2.27 per cent, compared with 2.95 per cent over the 13-year period beginning 1992, according to a study by the rating agency.

The default statistics validate Crisil's ratings as a reliable measure of default probability, Crisil managing director and chief executive officer R Ravimohan said releasing the default study.

The first default study covers Crisil's rating database spanning 13 years and covers two full economic cycles. The default rate is the proportion of the total defaults to the total outstanding ratings in a year.

Of the total 120 defaults in Crisil's rated instruments since 1992, as many as 80 defaults occurred during 1997-1999, which witnessed an economic downturn and regulatory changes, particularly in the non-banking financial services sector.

Ravimohan said the default rate study is significant as the Basel-II norms will measure a rating system for rating accuracy. He claimed that the study brings out the high level of Crisil ratings' default predictability.

The number of defaults is higher in the case of Crisil as its definition of a default is more rigorous compared to other Indian rating agencies.

Crisil deems as default if a corporate misses the due date for payment of interest or principal, whereas other rating agencies like ICRA follow the estimated loss method, taking into account the amount recoverable.

The Crisil rating is based on cash flows and any failure to make payments on a due date is a default that the rating did not predict.

Crisil executive director and chief rating officer Roopa Kudva said one of the key findings of the study is the high ability to predict defaults.

Crisil ratings had a 83.64 per cent overall rate of average stability, which is a measure of probability of ratings remaining unchanged and not showing any transition over a given time horizon.

The default rates for Crisil are comparable to those of Standard & Poor's globally, Kudva said. There has not been a single default in instruments rated triple A by Crisil.